Is it time to prepare for an interest rate rise?

July 31st, 2017

Is it time to prepare for an interest rate rise? The headline of this blog will be familiar to readers, who may well be thinking: ‘Didn’t I read this in 2011, 2012 and then 2014?’ What has happened since these headlines appeared? UK interest rates have been cut to a record low of […]

Is it time to prepare for an interest rate rise?

The headline of this blog will be familiar to readers, who may well be thinking: ‘Didn’t I read this in 2011, 2012 and then 2014?’

What has happened since these headlines appeared? UK interest rates have been cut to a record low of 0.25%, which highlights the benefits of looking through media speculation and so-called ‘market noise’.

With investors currently pricing in a 40% chance of an interest rate rise this year, is it time to prepare for an upwards move – or is this another false alarm?

There are a number of factors that suggest an interest rate hike could be on the cards. Firstly, inflation looks high in comparison to recent years. Consumer price inflation (CPI) has increased significantly since the Brexit vote, after a weak pound resulted in higher input prices. Inflation stood at 2.6% in June, far ahead of the Bank of England’s 2% inflation target.

Nevertheless, a 0.3% fall in June’s CPI indicates that inflation may have started to cool.

Hawkish comments from Monetary Policy Committee (MPC) members have added fuel to the fire. Bank of England chief economist Andy Haldane recently signalled his support for a rate rise later this year. This followed minutes from the MPC’s June meeting, which showed three out of its eight policymakers (excluding Haldane) had voted for a rate rise.

Bank of England governor Mark Carney also surprised investors in late June after he commented that ‘some removal of monetary stimulus is likely to become necessary’, representing a shift in tone.

However, Neptune’s chief economist James Dowey suggests Carney’s comments have been taken out of context because he was simply stating that the Bank of England would take action if higher inflation passed through to wages – something that is yet to happen.

‘That is the first reason to be much more sceptical than consensus that the Bank of England is going to raise rates – even though inflation is quite high. The second reason is that the economy looks like it is slowing down, so the second round effects are unlikely to transpire,’ Dowey explained.

The strength of the economy since the UK voted in favour of leaving the European Union has surprised many. During the second half of last year, this was largely driven by consumption.

However, higher inflation is now starting to constrain consumer activity. With wage growth at 1.7% (once bonuses are stripped out) and inflation at 2.6% – households are feeling the pinch. This means the UK consumer is unlikely to drive economic growth from here.

Can UK plc pick up the reins? Sadly the uncertainty surrounding Brexit is impacting business investment and sentiment amongst company owners.

Years of loose monetary policy has led to high government debt levels and inflated asset prices, which means that any errors in central bank policy could prove disastrous.

‘It’s really like treading on egg shells; central bankers need to deflate any asset bubbles very carefully to avoid another crisis,’ Lowman explained.

Can we expect an August rate rise? I think this looks unlikely, given the uncertainties surrounding Brexit. Also, remember that when the time comes these rate rises will be gradual, as the MPC is acutely aware of the pressures facing the UK consumer.

Nevertheless, if you look at the big picture interest rates remain at record lows, which means the only way is up. Clarity on economic growth appears to be the missing piece of the puzzle.

Danielle Levy, Freelance Journalist and Editor

Danielle is a freelance journalist and editor, with more than 10 years’ of experience in financial journalism. She has written for a number of publications, including The Telegraph, Daily Mail and The Independent. She was formerly deputy editor at Citywire Wealth Manager.

Is it time to prepare for an interest rate rise is a guest post and the views here do not necessarily concur with those of Investment Quorum. In fact it is very often the case that we may be largely in disagreement but we respect the opinions and views of others and value their contribution to the wealth management debate. Guest posts may appeal more to some than others and may often have an industry or sector knowledge expectation.

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